Tax Reform: New Bill Offers Ag Incentives, but Is It All Good?

Last Thursday Congressman Kevin Brady (R-TX), chairman of the House Ways and Means Committee, introduced a huge tax reform bill he says will simplify the tax code, lower individual rates, and create jobs. The “Tax Cuts and Jobs Act” includes several obvious wins for agriculture including the repeal of the estate tax and maintaining stepped-up basis for the inheritance of farm property, however, there are still questions about how beneficial the tax plan will be for farmers and ag businesses.

“We are worried that provisions in the House tax bill could hamper growth for many farms and ranches, and could actually increase the amount of taxes these operations pay,” said Jeff Wald, CEO of K·Coe Isom, an agricultural accounting and consulting firm, who emphasized that the bill would remove or alter many deductions used by farmers and ranchers today, such as interest deductibility and immediate expensing.

One particular provision continues to be a point of contention – the elimination of the Domestic Production Activities Deduction (Sec. 199), or DPAD, used by farm co-ops. The DPAD is a deduction that applies to proceeds from agricultural products that are manufactured, produced, or grown by farmers.

There are special provisions that allow cooperatives to pass the benefit of the deduction directly through to their farmer members. According to the National Council of Farmer Cooperatives, the deduction returns nearly $2 billion annually to rural areas in all 50 states.

“Our co-op members pass the Section 199 deduction back to their individual farmer owners, most of whom are not organized to pay taxes under the corporate code, thus the corporate rate reduction in the package won’t reach them. But if Section 199 goes away, a tax hike will reach them,” said Ben Mosely, USA Rice vice president of government affairs.

“With the agricultural economy where it is – the deepest slump since the Great Depression – farmers can’t afford the increase in their tax burden that the repeal of Section 199 would lead to.”

Mosely continued, “This legislation is obviously complex and we’ll be weighing in throughout the process in hopes to improve it. At the end of the day to our farmers, tax reform means that the amount they pay in taxes every year goes down. If taxes stayed about the same after reform, they’d probably wonder what all the fuss was about. But if their taxes go up that would be nonstarter.”

This week the bill will go through a committee markup in the House where there is potential for change and amendment. Senate Finance Committee Chairman Orrin Hatch plans to release a version for his Committee to consider after the House Ways and Means Committee completes their deliberations.